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Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.

October 23, 2017

ACH and Consumer-Only Payments: Will the Twain Ever Meet?

For many years, person-to-person (P2P) payment providers have touted the emergence of compelling P2P mobile-based products that exploit some combination of financial institutions (FIs) and fintech providers. Several players have made notable inroads into P2P with certain demographics and use cases, but the overall results in terms of absolute numbers are far from ubiquitous. This post uses hard numbers to explore what progress ACH has made with P2P payments.

During a payments conference earlier this year that showcased findings from the Fed's triennial payments study (here and here), the table below was presented showing the number and value shares of domestic network ACH payments in 2015. The table is complicated because it shows both debit pull and credit push payments by consumer and business counterparties. Despite the complexity, the table distills ACH to its essence by removing details associated with the 14 transaction payment types (known as Standard Entry Class codes) that carry value for domestic payments. Many of these individual codes reflect similar types of payments (for example, three codes are used for converting first presentment checks to ACH). As expected, virtually all payments involve at least one business party to each payment. Consumer-only payments are negligible.

In a typical use case for consumer-only ACH, a consumer transfers funds from one account to another account across financial institutions. As shown in the solid red oval, 0.04 percent of all domestic payments were consumer-to-consumer payments, where the payee initiated a debit to the payer's bank account. For consumer credit push payments, the figure is 0.3 percent. The combined figure rounds to 0.3 percent. On the value side for consumer-only payments (in the dashed red oval), debit pulls, credit pushes, and the combined figure were 0.02 percent, 0.2 percent, and 0.2 percent, respectively. These types of payments typically reflect P2P payments1, when one consumer pushes funds to another consumer.

The next table shows the figures that prevailed in 2012. Given the modest share by both number and value across both years, it is apparent—and interesting—that ACH has made little progress in garnering consumer-only payments. Although ACH is ubiquitous on the receipt side across all financial institutions, it is not so for consumers, given the lack of widely promoted and compelling service offerings from FIs and no standardized form factor like there is for card payments. Additionally, many small FIs do not offer ACH origination services.

This lack of adoption is not unique to ACH. Although some of the electronic P2P entrants are experiencing significant growth, it will be some time before they supplant the billions of P2P cash and check payments. P2P players on the FI-centric side include Zelle, which a large consortium of banks owns. Non-FI providers include PayPal and its associated Venmo service. Given the lack of ubiquity with the new offerings, the fallback option for consumer-only payments is cash and checks. As the payments study reports, check use is still declining, though the most recent trend shows that this decline has slowed. ACH or other electronic options still seem a good bet to continue to erode paper options, but perhaps the market is signaling that paper options have ongoing utility and are still preferred if not optimal for some users in some instances.

So what would it take for ACH to gain some traction in the consumer payments space? Perhaps the presence of same-day ACH, in which credits were mandated in September of 2016 and debits followed in September 2017, offers some opportunity for compelling service offerings coupled with a user-friendly way to send an emergency payment to your ne'er-do-well son.

What are your views on the viability of ACH garnering more P2P payments?

By Steven Cordray, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

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September 25, 2017

Fed Payments Webinar Series Launching

One of the comments we consistently received when we conducted the Mobile Banking/Payments Survey last fall was the desire for the Atlanta Federal Reserve to provide more educational opportunities on current payment technologies and issues. Not only have small and mid-sized financial institutions expressed this need, but so have consumer advocacy groups and law enforcement agencies. Educational efforts, along with research, on payment risk issues are at the core of the Retail Payments Risk Forum's overall mission.

In response to these requests, the Risk Forum is launching a webinar series called Talk About Payments (TAP). The TAP webinars will supplement this blog, forums and conferences we convene, and other works we publish on the Forum's web pages. The current plan is for the webinars to be presented once a quarter. Financial institutions, retailers, payment processors, law enforcement, academia, and other payment system stakeholders are all welcome to participate in the webinars. Participants can submit questions during the event.

We will have our first webinar—titled "How Safe Are Mobile Payments?"—on Thursday, October 5, from 1 to 2 p.m. (ET). The webinar will cover such topics as mcommerce growth, mobile wallets, tokenization, fraud attack points, and risk mitigation tools and tactics.

Participation in the webinar is complimentary, but you must register in advance. To register, go to the TAP webinar web page. After you complete your registration, you will receive a confirmation email with all the log-in and toll-free call-in information.

We hope you will join us for our first webinar on October 5, and for our future webinars. If there are any particular topics you would like for us to cover in future webinars, please let us know.

By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

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August 14, 2017

Extra! Extra! Triennial Payments Data Available in Excel!

In countless old black-and-white movies, street newspaper vendors would shout out the latest sensational news from hot-off-the-press special editions. The Fed is no different in that we want to shout out that it is no longer necessary to mine the PDF-based Federal Reserve Payments Study report to extract the study's data. For the first time, we are offering our entire aggregated data set of estimated noncash payments in an Excel file. The report accompanying the data is here.

The data set is very rich and covers the following categories:

Accounts and cards

Private-label credit processors

Checks

Person-to-person and money transfer

ACH

Online bill pay

Non-prepaid debit

Walk-in bill pay

General-purpose prepaid

Private-label ACH debit

Private-label prepaid issuers & processors

Online payment authentication

General-purpose credit

Mobile wallet

Private-label credit merchant issuers

Here is another table that is just one extract from the non-prepaid debit card portion of the extensive payments data available.

To get a taste of what this data can teach us, let's look closer at the cumulative volume distribution by payment dollar value threshold for non-prepaid debit cards (the data are shown above) along with general-purpose credit cards. The number and value of both types of payments grew substantially from 2012 to 2015, the last two survey periods. The chart compares these distributions, showing more vividly how this growth affected the relative proportions of payments of different dollar values.

For example, debit card payments below $25 accounted for 59.1 percent of all payments in 2012 versus 61.8 percent in 2015—evidence that debit card purchases are migrating to lower ticket amounts. The trend is even more dramatic over the same time span for general-purpose credit cards.

Because this is a distribution, increases in the relative number of small-value payments must be offset by decreases in the relative number of large-value payments. Unfortunately, our previous survey capped the payment threshold at $50 in 2012. Otherwise, we would see the dashed 2012 lines crossing over the solid 2015 lines at some payment value threshold above $50. In brief, the results suggest cash payments are continuing to migrate to debit cards, while credit cards may be garnering some share at the expense of both cash and debit cards.

The challenge is on for you data analysts out there. Please share your findings.

By Steven Cordray, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

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July 24, 2017

FIDO Tightens Authentication's Leash

Our blog often covers user authentication challenges confronting financial institutions and merchants. We feel this topic is essential given that consumers are increasingly going online to make payments and their passwords tend to be weak. Financial institutions and merchants face a difficult balancing act. They must be confident that their authentication tools effectively confirm the legitimacy of the individual attempting a transaction, but they also have to make sure these tools don't create a bad experience for the customer.

A meeting in 2009 between a fingerprint-sensor manufacturer and a global, third-party payment provider to fingerprint-enable online payments quickly turned into a conversation on how to develop an industry standard for the general use of biometrics to identify online users. Ultimately, this meeting led to the formation of the FIDO (Fast IDentity Online) Alliance in 2012. FIDO currently has a global membership of more than 250 companies and agencies spanning the payments, mobile, PC, and transaction security industries.

FIDO's principal effort has been to develop a set of specifications and certifications covering consumer devices, mobile and web applications, and biometric authentication methods for e-commerce applications. Products certified to these authentication specs reduce password dependence, transaction friction, and stolen password attacks such as phishing, man-in-the middle attacks, and transaction replays.

FIDO initially focused on mobile devices—which allow authentication with the fingerprint sensor, microphone, and camera—and developed the Universal Authentication Framework. This framework provides enhanced security using public-key cryptography, with the keys and biometric templates remaining on the mobile device. The user goes through a device registration process that creates the biometric template and a cryptographic key pair on the device and registers only the public key with the online service. To perform a transaction, the customer uses one of the phone's biometric sensors to unlock the private key on the device.

To expand these strong cryptographic authentication capabilities to second-factor use cases on the web, FIDO established a second set of specifications known as FIDO U2F, or Universal Second Factor protocol. With this protocol, the user inserts a certified U2F device, also known as a security key, into a device's USB port or uses the device's Bluetooth or near-field communication features. The application running in a FIDO-compliant web browser first challenges the user for a password and then authenticates the user with the cryptographic private key on the U2F device.

Authentication of customers, especially on a remote basis, will always be a challenge as criminals find more and more ways to spoof identities. The industry's efforts to increase the security of remote payments remain ongoing and the cooperative work demonstrated by groups such as the FIDO Alliance plays an important part in that effort.

By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

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March 6, 2017

Asset Size Matters in Survey Responses

A January post highlighted some of the key findings of the 2016 Mobile Banking and Payments Survey conducted in the Sixth District. The post and the related survey report segmented the findings between banks and credit unions to help financial institutions setting strategy for mobile banking and payment services.

As promised, we analyzed the results to each of the questions based on the reported overall asset size of the responding financial institutions broken down into five asset range segments. The table shows these segments and the percentage breakdown of the 117 respondents by each segment.

You can find the supplemental data for all the survey questions here. One of the most striking differences among the segments is the institutions’ plans to offer mobile payment services. As the chart shows, the smaller the financial institution, the more likely it is to have no plans to offer mobile payment services within the next two years.

We hope this information will help financial institutions as they evaluate and plan their mobile banking and mobile payment services. Next quarter, we will publish a report consolidating all the data received across the seven Federal Reserve districts that participated in the survey. If you have any questions concerning the Sixth District results, please let us know.

By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

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February 27, 2017

Wouldn't It Be Nice to Tap and Pay?

In the mid-2000s, after setting up a new checking account following a move, I received a debit card that, in addition to the magnetic stripe, had contactless functionality. I remember thinking how "cool" this feature would be, not having to swipe the magnetic stripe but simply tapping the card on the point-of-sale (POS) terminal. However, I quickly became disappointed, as I couldn't use the tap functionality in most places that I shopped. In the few places that did allow for taps, I don't recall the tap ever working properly. After a few months, I never attempted to tap it again and reverted to the traditional swipe.

Fast forward to 2017, and contactless card usage is surging in the United Kingdom, Australia, and Canada while remaining all but nonexistent in the United States. In November 2016, contactless cards accounted for nearly 25 percent of all card payments in the United Kingdom, up from 11 percent since November 2015. In Australia, Visa reported that 75 percent of face-to-face transactions over their network happen via their contactless solution. And in Canada, 99 percent of Mastercard's consumer credit cards are contactless-enabled. A 2016 report found that Canadian consumers were frustrated by merchants that didn't accept contactless payments. All of these countries have also gone through a migration of their payments cards to EMV chip cards. Did the United States miss a great opportunity when chip cards replaced the magnetic-stripe-only payment cards?

Interestingly, in these markets where contactless card adoption rates are surging, contactless cards are leading the contactless payment push ahead of mobile payments. In the United States, we are heading in the opposite direction, with mobile contactless attempting, and struggling, to get traction. No doubt, mobile is the more challenging environment, with a variety of form factors (iPhone, GalaxyS7, Pixel, and more), different ways that the form factor can interact with the POS terminal (such as near-field communication, magnetic source transmission, and barcode), and a variety of different wallets compatible with the different form factors. With a contactless card, you get one form factor—a card—and one method of contactless interaction. (Multiple-interface cards can still be swiped or dipped at the POS.)

I am convinced that the investments made in mobile contactless to this point are one of several factors holding up this country's transition to a contactless card environment. Consumers are confused by the experience and merchants and issuers are struggling with the wide range of options to consider, such as which wallets to enable and which technologies to support. Contactless cards have the ability to create a ubiquitous experience for both consumers and merchants. And this writer believes that a payment experience can't get any easier than a tap of the card.

It's hard for me to believe that it has been 20 years since I received my keychain Speedpass fob. I have positive memories of the simple and seamless transactions that I experienced when purchasing gas by touching the contactless fob to the gas pump reader. Unfortunately, I moved to a location with very few stations that accepted my fob. I always wished that I could have a similar experience for other purchases. Contactless cards allow for that and in a much easier and simpler fashion than my mobile phone allows. So can we get on with contactless cards? I am ready to tap and pay everywhere. Are you?

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February 13, 2017

The Five-Star That Flops

For the most rabid college football fans, a major day just occurred—National Signing Day, the day when high school seniors sign scholarship papers to attend their colleges of choice. Not only have these seniors been evaluated by coaches, but also entire websites are devoted to their evaluation and ranking using a star-based system, with a five-star player being a top-rated, can't-miss player. Traditionally, much fanfare accompanies these players, and media and fans shower them with attention. Many times, these five-star players go on to accomplish great things at their respective schools, but sometimes they are "busts," failing to live up to lofty expectations and making minimal or no impact for their team. Unfortunately, my college team has had its fair share of five-star busts. Because of being let down, I no longer get caught up in recruiting rankings and I don't fret about the big recruit that got away. And in 2017, this is my new attitude when it comes to mobile payments at the point of sale, or POS.

I've been in the payments industry for a decade, and for over half of that time, I've been hearing and reading how mobile payments are going to change the POS experience. I've heard major announcements about new mobile payment wallets, from Apple Pay to Samsung Pay, and platforms, such as LevelUp, time and time again. I have overheard conversations with contemporaries and colleagues about the latest and greatest mobile solution that will forever change my experience at the POS.

But in 2017, I am not hearing any of this anymore because I am tuning it out. Oh, I am sure that I could attend a conference this year and within the first hour, someone would state that 2017 is the year of mobile payments. But after hearing about the next great mobile wallet or that this wallet will finally bring mobile payments to scale repeatedly, year after year (you get my tone by now), I am no longer getting caught up in the hype around using my phone instead of a card at the POS.

However, I will continue to get excited about mobile commerce opportunities. With more and more people shopping on their mobile phones and tablets, apps and in-browser platforms are making that experience so much better. When picking up a coffee on my way to the office or grabbing a chicken sandwich for lunch after ordering ahead on my mobile phone, I always wonder to myself, why are all those people standing in line? (I am a bit worried, and apparently rightfully so, that as more people use order-ahead features, that pick-up line might grow to be worse than the traditional ordering line.) During the Christmas season, I purchased many gifts on my mobile phone, and that experience was almost always simple and seamless—unlike in years past, when it was a bit cumbersome.

Using my phone to order ahead or shop online has truly simplified my life, unlike using my phone as a replacement to a card at the POS. With so much hype around mobile at the POS, I believe that many people only relate mobile payments to this use case, but it is so much broader. And I believe the mobile commerce piece is akin to the unheralded two-star recruit who goes on to lead his team to the national championship. What do you think 2017 entails for mobile and its place in payments and commerce?

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January 30, 2017

Pssst…Have You Heard about PSD2?

No, I'm not talking about the latest next-generation video gaming console. I am referring to the revised Directive on Payment Services (PSD2) that the European Parliament adopted in October 2015 and that will serve as the legal foundation for a single market for European Union (EU) payments. The original PSD was adopted in 2007 but, according to official statements, the Parliament found that an update was necessary to incorporate new types of payment services, improve consumer protection, strengthen payment transaction security, and increase competitiveness with an expected result of lower consumer fees in the payments processing market. PSD2 applies only to digital payments and must be in force in all EU countries by January 13, 2018.

The directive and subsequent implementation rules that the European Banking Authority* is developing make a number of major changes in the European banking landscape, including:

Opens up the regulated financial services system to merchants and processors who might initiate payments on their consumer customer's behalf as well as data aggregator firms. In particular, PSD2 will apply to any financial institutions already operating within the scope of the PSD but will also apply to third parties such as operators of e-commerce marketplaces, gift card and loyalty plans, bill payment service providers, public communication networks, account access services, mobile wallets, and those who receive payment by direct debit.

Requires financial institutions, upon the request of their customers, to allow these approved nonbank, third parties significant, but not unlimited, access to the customer's account and transaction data through APIs (application program interfaces). Many financial institutions see having to turn over customer data to potential competitors as a significant threat to the retention of their customer's business as well as concerns with data security.

Sets out two-factor customer authentication as an absolute minimum, with additional security such as one-time passwords required for higher-value transactions. The card issuer must actively authenticate all transactions above 10 euros. Critics of these provisions point out that the criminals will have fixed transaction amounts and authentication methodology information to modify their attacks.

Supplementing card interchange limits imposed in December 2015, prevents merchants from adding surcharges to payment card transactions. Under the original directive, each country established rules regarding surcharging on card payments. It has been a common practice of European merchants to levy a surcharge on payment card transactions to offset the interchange fee paid to issuers.

While such a comprehensive single package of regulations is unlikely to occur in the United States, various flavors of these items have been and continue to be discussed. Do you favor such types of regulation here in the United States? I suspect the answer depends on your role in the payments ecosystem. I am interested in hearing from you.

By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

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January 9, 2017

The Year in Review

As we move into 2017, the Take on Payments team would like to share its perspectives of major payment-related events and issues that took place in the United States in 2016, in no particular order of importance.

Cybersecurity Moves to Forefront—While cyber protection is certainly not new, the increased frequency and sophistication of cyber threats in 2016 accelerated the need for financial services enterprises, businesses, and governmental agencies to step up their external and internal defenses with more staff and better protection and detection tools. The federal government released a Cybersecurity National Action Plan and established the Federal Chief Information Security Office position to oversee governmental agencies' management of cybersecurity and protection of critical infrastructure.

Same-Day ACH—Last September, NACHA's three-phase rules change took effect, mandating initially a credit-only same-day ACH service. It is uncertain this early whether NACHA will meet its expectations of same-day ACH garnering 1 percent of total ACH payment volume by October 2017. Anecdotally, we are hearing that some payments processors have been slow in supporting the service. Further clarity on the significance of same-day service will become evident with the addition of debit items in phase two, which takes effect this September.

Faster Payments—Maybe we're the only ones who see it this way, but in this country, "faster payments" looks like the Wild West—at least if you remember to say, "Howdy, pardner!" Word counts won't let us name or fully describe all of the various wagon trains racing for a faster payments land grab, but it seemed to start in October 2015 when The Clearing House announced it was teaming with FIS to deliver a real-time payment system for the United States. By March 2016, Jack Henry and Associates Inc. had joined the effort. Meanwhile, Early Warning completed its acquisition of clearXchange and announced a real-time offering in February. By August, this solution had been added to Fiserv's offerings. With Mastercard and Visa hovering around their own solutions and also attaching to any number of others, it seems like everybody is trying to make sure they don't get left behind.

Prepaid Card Account Rules—When it comes to compliance, "prepaid card" is now a misnomer based on the release of the Consumer Financial Protection Bureau's 2016 final ruling. The rule is access-device-agnostic, so the same requirements are applied to stored funds on a card, fob, or mobile phone app, to name a few. Prepaid accounts that are transactional and ready to use at a variety of merchants or ATMS, or for person-to-person, are now covered by Reg. E-Lite, and possibly Reg. Z, when overdraft or credit features apply. In industry speak, the rule applies to payroll cards, government benefit cards, PayPal-like accounts, and general-purpose reloadable cards—but not to gift cards, health or flexible savings accounts, corporate reimbursement cards, or disaster-relief-type accounts, for example.

Mobile Payments Move at Evolutionary, Not Revolutionary, Pace—While the Apple, Google, and Samsung Pay wallets continued to move forward with increasing financial institution and merchant participation, consumer usage remained anemic. With the retailer consortium wallet venture MCX going into hibernation, a number of major retailers announced or introduced closed-loop mobile wallet programs hoping to emulate the success of retailers such as Starbucks and Dunkin' Brands. The magic formula of payments, loyalty, and couponing interwoven into a single application remains elusive.

EMV Migration—The migration to chip cards and terminals in the United States continued with chip cards now representing approximately 70 percent of credit/debit cards in the United States. Merchant adoption of chip-enabled terminals stands just below 40 percent of the market. The ATM liability shift for Mastercard payment cards took effect October 21, with only an estimated 30 percent of non-FI-owned ATMs being EMV operational. Recognizing some of the unique challenges to the gasoline retailers, the brands pushed back the liability shift timetable for automated fuel dispensers three years, to October 2020. Chip card migration has clearly reduced counterfeit card fraud, but card-not-present (CNP) fraud has ballooned. Data for 2015 from the 2016 Federal Reserve Payments Study show card fraud by channel in the United States at 54 percent for in person and 46 percent for remote (or CNP). This is in contrast to comparable fraud data in other countries further along in EMV implementation, where remote fraud accounts for the majority of card fraud.

Distributed Ledger—Although venture capital funding in blockchain and distributed ledger startups significantly decreased in 2016 from 2015, interest remains high. Rather than investing in startups, financial institutions and established technology companies, such as IBM, shifted their funding focus to developing internal solutions and their technology focus from consumer-facing use cases such as Bitcoin to back-end clearing and settlement solutions and the execution of smart contracts.

Same Song, Same Verse—Some things just don't seem to change from year to year. Notifications of data breaches of financial institutions, businesses, and governmental agencies appear to have been as numerous as in previous years. The Fed's Consumer Payment Choices study continued to show that cash remains the most frequent payment method, especially for transactions under 10 dollars.

All of us at the Retail Payments Risk Forum wish all our Take On Payments readers a prosperous 2017.

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November 21, 2016

Are Mobile Phone Payments Secure?

A consistent and leading reason consumers give as to why they don't use their mobile phone to make payments is their concern about the phone's level of security. While many consumers don't believe that mobile payments are as safe as other payment methods, is that actually the case? For more than six years, the Federal Reserve Banks of Atlanta and Boston have been supporting the Mobile Payments Industry Workgroup (MPIW). The MPIW was created to facilitate the development of a vision for a mobile payments environment that will be effective, secure, and ubiquitous. This group has met frequently to address the issues of technology, standards, security, privacy, functionality, regulation, and adoption barriers. The various deliverables from past MPIW meetings focus on security and risk and can be found on the Federal Reserve Bank of Boston's website.

As this blog has noted numerous times over the last two years, the migration to chip cards for in-person POS payments will shift more fraud over to the card-not-present (CNP) market. With the introduction of numerous mobile wallets since 2014 that can be enabled on smartphones, the MPIW believed that an assessment should be made of the risk issues associated with commerce generated through the mobile phone—or m-commerce—whether through a browser or a specific wallet application. Over the last eight months, Fed representatives and mobile payment experts have been working on the development of a white paper, which was released on November 8. You can access the full report here.

The MPIW's report provides an assessment and the future position of mobile payments as a part of the overall e-commerce growth expected in the United States. It groups the various types of remote mobile payments into four use cases and dissects the transaction flow for each use case with a description of the potential risk attacks in each key function of the transaction. We believe the report provides the payments industry with a sound primer of mobile wallet transaction security issues. While there are attack points in the mobile phone channel just as there are in other payment channels, the mobile phone offers features that can make a mobile payment transaction much more secure than many people currently believe. The MPIW will continue to assess the mobile CNP payments environment and produce presentations and other materials intended to educate the industry and consumers.

You can find additional MPIW white papers and other publications on the MPIW web page.

By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

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